Which is where the Big Mac Index comes in, developed 14 years ago by the Economist, one of the world's most intelligent magazines. The basic assumption is two-fold. First, since this fast-food product is identical in the 120 countries where it is currently sold, it should deliver a perfect standard of comparison. Second, since in the long run, prices for such a "basket" of goods and services should converge on a single point, actual price differences measure the extent to which national currencies are either over- or undervalued. Put differently, one dollar should buy the same number of bites of this bun, mayo and meat contraption all over the world. This is the concept of "purchasing-power parity
Alas, one dollar does not buy the same number of Big Mac calories throughout the world. A Big Mac in the U.S. costs on average about $ 2.50. A Big Mac in Euroland can be had for $ 2.20 at the current euro/dollar exchange rate In other words, you can get more for your money on the Old Continent; the Big Mac is about 30 cents cheaper here. Hence, the euro is undervalued by about 12 percent.
If you believe in the concept of purchasing-power parity and the law of ultimate convergence, take heart. The euro shall rise again. Except, don't bet your whole bank account on it right now The Big Mac Index merely asserts a sound principle of international economics. But it does not tell you when exactly the long run comes true.